Welcome to our Regulatory Highlights for July 2023.

Key Takeaways

• Representation and conduct that may be false and misleading in nature remains high on ASIC’s list;
• Licensees need to carefully review their ESG-related disclosures;
• Ongoing monitoring and promptly dealing with any gaps identified are an integral part of a robust compliance framework;
• Financial services providers may learn from APRA’s recent publications when managing their cybersecurity;
• Reporting entities that fail to comply with their AML/CTF obligations may face sever consequences.

Financial Services Highlights

David Hunty Sutton banned and APC Securities Pty Ltd’s AFSL cancelled

ASIC has cancelled APC Securities Pty Ltd (APC Securities)’s AFSL 338943, effective from 29 June 2023.

With respect to Mr David Sutton, ASIC has:

• permanently banned him from providing financial services, being involved in a financial services business, or otherwise controlling a person that carries on a financial services business;
• disqualified him from managing corporations for five years;
• concluded that he was not a ‘fit and proper person’ to provide financial services, a result of Mr Sutton’s conduct in making investment offers of unlisted shares via APC Securities in a number of Australian and overseas entities, including:
  • making representation or engaging in conduct that was false and misleading;
  • his failure to take reasonable steps to ensure that APC Securities’ representatives did not receive conflicted remuneration;
  • his involvement in and facilitation of Kristofer Ridgway’s misconduct.
• found that he failed to discharge his director’s duties (due diligence and care).

National Anti-Scam Centre’s first fusion cell to disrupt investment scams

The National Anti-Scam Centre (NASC) will coordinate an investment scam fusion cell to specifically tackle investment scams, to be led by ASIC and the Australian Competition and Consumer Commission (ACCC), with representatives from banks, the telecommunication industry and digital platforms, with the following aims:

• Early intervention and disruption;
• Removal of investment scam websites;
• Sharing information with the private sector and the general public; and
• Identification of intelligence to refer to law enforcement agencies.

‘Fusion cells’ are time-limited taskforces designed to swiftly tackle specific and urgent problems, leveraging on expertise drawn from both the public and the private sectors.

The NASC will organise a number of fusion cells to deal with different types of scams.

Select AFSL Pty Ltd etc and Russell Howden penalised $13.6 million in total

The Federal Court imposed a total of $13.6 million penalties on Select AFSL Pty Ltd AFSL 408647 (Select), BlueInc Services Pty Ltd (BlueInc) and Insurance Marketing Services Pty Ltd (IMS), and Mr Russell Howden, the former managing and sole director of Select and BlueInc, for their involvement in unconscionable conduct, provision of conflicted remuneration to sales agents, and other contraventions of the financial services laws, in relation to the selling of various insurance products. Mr Howden was penalised for the breaches of his director’s duties.

The more specific types of conduct can be found here, including:

• Coercing customers to purchase policies by adopting pressure tactics while ignoring the customers’ repeated objections and requests for time to consider the policies;
• Harassing consumers by repeatedly contacting them and asking for premium payments for policies that the customers did not want or could not afford;
• Making misrepresentations to consumers about the policies;
• Failing to act efficiently, honestly and fairly in relation to the ‘Refer a Friend’ program, incentivising new customers to share the contact information of their family and friends without their consent.

Openmarkets Australia Limited penalised for compliance failures

The Markets Disciplinary Panel (MDP) has imposed a record penalty of $4.5 million on Openmarkets Australia Limited ACN 090 472 012 (Openmarkets), for the latter’s failure to observe the market integrity rules.

The MDP also issued Openmarkets with an infringement notice, requiring it to engage an independent expert to assess and report on a variety of matters, including Openmarkets’ organisational and technical resources, design and effectiveness of its procedures, client onboarding and client money.

The MDP emphasised, among other things, the importance of having a robust compliance framework and the ongoing monitoring. It was satisfied that Openmarkets:

• Had reasonable grounds to suspect that the simultaneous placement of bid and ask orders in the same security and at the same price by Openmarkets’ clients were likely to have the effect of creating an artificial trading price or a false and misleading appearance of active trading;
• Failed to:
  • appropriately adjust its post-trade surveillance system;
  • have appropriate supervisory procedures to ensure its compliance with the relevant market integrity rules or submit suspicious activity reports to ASIC;
  • have sufficient human resources with the appropriate skills, knowledge and experience to conduct trade surveillance;
  • engage the anti-wash trade filter;
  • prevent its senior staff’s unprofessional conduct;
• Allowed a $20 million deficiency to remain in its trust account for up to 35 consecutive business days.

ASIC’s greenwashing antidote

ASIC stresses that meaningful disclosure is an effective and enduring antidote to greenwashing.

ASIC has taken 35 regulatory interventions against greenwashing activities between July 2022 and March 2023, emphasizing that sustainable finance is a ‘whole of ASIC’ regulatory priority. The interventions were in relation to:

• Statements with respect to net zero or relate targets did not appear to have a reasonable basis, or were factually incorrect;
• The adoption of terms such as ‘carbon neutral’, ‘clean’ or ‘green’ without having an apparently reasonable basis;
• Inaccurate labelling and vague terminology;
• Vague or overstated scope of environmental, social and governance (ESG) related screen or exclusions.

ASIC files greenwashing case against Vanguard Investments Australia Ltd

ASIC has filed its civil penalty proceedings against Vanguard Investments Australia Ltd (Vanguard) in the Federal Court, alleging misleading conduct associated with Vanguard’s ESG claims with respect to Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund), investments in which were based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index).

Vangaurd’s ESG claims were to the effect that the Index (and therefore the Fund) excluded issuers with significant business in industries such as fossil fuel, alcohol, tobacco, gambling, weapons, nuclear power, and adult entertainment.

ASIC alleges that:

• the ESG claims were false and misleading, as no ESG research was conducted over a material portion of the bond issuers in the Index and the Fund;
• issuers violating the ESG criteria were included in the Index and the Fund;
• Vanguard misled the public through a number of channels, including a media release, its Product Disclosure Statement, statements made on its website, statements made in an interview with Finance News Network and statements made at a Finance News Network Fund Manager event.

Notably, the focus of the case is that the Vanguard has failed to observe the ESG criteria that it has said it would follow.  

ASIC files case against Sasha Hopkins etc for unlicensed conduct

ASIC has filed civil proceedings against Sasha Hopkins and The A Team Property Group (Company), alleging, among other things, the operations of numerous unregistered managed investment schemes without holding an AFSL.

Importantly, ASIC alleges that Mr Hopkins and the Company promoted the business online and through social media, offering property investment opportunities through a ‘joint venture’ program without holding an AFSL.

While real property is not a financial product, an interest in a managed investment scheme is. This matter serves as the latest reminder that a person wishing to provide financial products and services in Australia must hold a financial services licence with the appropriate authorisations, unless an exemption applies.

ASIC imposes additional licence conditions on Shartru Wealth Management Pty Ltd

ASIC has imposed additional conditions on Shartru Wealth Management Pty Ltd AFSL 422409 (Shartru), requiring it to have its audit processes reviewed by an independent consultant.

Shartru is a wealth advisory business that is authorised to provide a range of financial products and services to both wholesale and retail clients.

ASIC’s targeted surveillance identified Shartru’s failure to:

• have adequate monitoring and supervision processes in place for its representatives; and
• discharge the best interest duty and the related obligations with respect to some financial product advice provided to its clients.

APRA’s cybersecurity stocktake

Approximately 24% of the entities regulated by the Australian Prudential Regulation Authority (APRA) participated in the first tranche of CPS 234 Information Security assessments. The typical gaps identified through the process include:

• Incomplete identification and classification for critical and sensitive information assets;
• Limited assessment of third-party information security capacity;
• Inadequate definition and execution of testing programs;
• Inadequate reviews and testing of the incident response plans;
• Inadequate internal reviews of the information security controls; and
• Failure to report material incidents and control weaknesses to APRA in a consistent and timely manner.

While the majority of AFSL holders are not regulated by APRA and hence the prudential standards do not apply, the gaps identified in this assessment are very much relevant to the operations of financial services businesses. Licensees may wish to consider these findings in managing their own cybersecurity arrangements, including the design, implementation, ongoing monitoring, review and updates.

APRA finalises CPS 230 Operational Risk Management

APRA has finalised CPS 230 Operational Risk Management to facilitate more effective management of operational risks by its regulated entities, such as banks, insurers and superannuation trustees, by requiring them to:

• Address identified weaknesses in existing systems and controls;
• Improve business continuity arrangements;
• Strengthen third-party risk management by appropriating addressing risks associated with material service providers.

The new standard will beco

me effective from 1 July 2025.

While the majority of AFSL holders are not regulated by APRA and hence the prudential standards do not apply, it may still be worthwhile for licensees to consider the standard in reviewing and updating its risk management framework as a matter of best practice.

AML/CTF Highlights

Chief Executive Officer of the Australian Transaction Reports and Analysis Centre v Crown Melbourne Limited [2023] FCA 782

The Federal Court handed down its judgement, and agreed with the penalties proposed by AUSTRAC and Crown, a total of $450,000.00 million to be paid over two years, which can be broken down as follows ([224]):                                                                                                                            

Most importantly, Justice Lee made it clear that:

• The Court will not simply rubber stamp any proposed penalties, but rather, ‘the Court seeks to understand the nature of the issues, and manage the proceedings consistently with the overarching purpose’ ([12]); and
• The penalties have to hurt enough for them not to be seen as an ‘acceptable cost of doing business’ ([207]).